Dallas Wells: We want to kind of wrap things up with another interactive conversation. Again, I think that’s where a lot of the value comes from, conferences like this. What we want to do is take all the purpose stuff that we talked about yesterday morning, the specific examples from the banks that we heard from yesterday afternoon, and then Mikey and Mike this morning, of really putting the culture and then the storytelling and engaging with your customers. Take all that stuff together and give you guys a pretty diverse panel here to take those concepts and talk about well, what are some of the things that we can start with. Yesterday’s panel was kind of some of the headaches and the bumps in the road and how we’re dealing with those. What we want everybody to leave with, and what Carl kind of started this thing with, was we want you to have the basic framework, this idea, and see the concept and the point on the horizon.
But you should also, if this is going to be of any use to you, you should have some tangible things that you can take with you. I saw lots of furious note scribbling from the two talks earlier today. That’s what we’re after here, again, is to get you guys some things to take home and say this is one that I can take home and put in place.
I’ll give a quick introduction to our panel here and then I’ll let them tell you, in more depth, who they are and what they do. We’ll start right here, Sean Doherty. I know this guy a little bit. We worked together for several years, and I consider Sean a good friend. But Sean’s the president of Asset Management Group, which is a subsidiary of Country Club Bank in Kansas City. They do asset liability management consulting and modeling.
We’ve got Jill Castilla. If you’re in this room and you don’t know who Jill is, you’ve been hiding under a rock somewhere, because Jill’s one of the true faces of the industry, won some little awarded called community banker of the year last year. All of that, of course, pales in comparison to being an early guest on our podcast. Which, I’m sure, was the real highlight of your year last year. Jill’s been great about taking a couple of leaps of faith with us, doing the podcast when we were just getting it up and going, doing this conference in our first year. Jill, thank you for joining us.
Then, finally, we’ve got Todd Classen. Todd is with Moody’s Analytics. By the way, Moody’s Analytics sponsored Mikey Trafton, so again, if you got good stuff from Mikey, and I know we’ve used the heck out of everything Mikey does, that was made possible by the guys at Moody’s. Todd’s also got a really good story about kind of why he does what he does. We’ll get into that in a little bit.
I’ll get us started with some questions, but again, we’ll kick this out to you guys pretty quickly and let you guys ask some of your questions, too. But we’ve got here somebody who understands the balance sheet and kind of how do we take … Yes, we want to serve our customers well, but we also have this little thing called earnings and risk that we have to deal with. How do you bridge that gap? Jill’s been doing this, building a customer-facing experience and a culture and doing pretty well with it. Your bank has done a big turnaround and has good results to show from all those efforts, so I think we can get a lot of good stuff from you of just things we can take back and start doing in the bank.
Then, Todd, you wanted to stress, I think, I’m not a banker. I took that a little personally, just a little. But Todd’s got a background in technology and, again, trying to bridge that gap between the wonderful, noble purpose that banking has and making it really just work and making those things possible, for community banks especially. I’ll get off my soapbox and Sean, why don’t you introduce yourself and kind of talk about what you do.
Sean Doherty: Okay. Thank you, first of all, to PrecisionLender for a great conference, learned a lot. This has been great, so thank you to your whole team. Asset Management Group really is a asset liability consulting and modeling firm. We started in 1995. We currently have about 170 clients around the country in 25 states. Really, our job is to take the difficulty of the asset liability modeling process and simplify it. If we can do that, and we can then educate our clients on okay, here’s what you have, here’s where the risks are, and here’s how we mitigate those risks without giving up the earnings component, we feel like we’ve done our job. We spend a lot of our days just listening to what our clients are telling us, what their examiners are telling them, and trying to figure out a way that we can help them meet those objectives that they need to meet.
Our basic premise is, if you understand the asset liability function, you understand the bank. That is one of our primary objectives is to help our clients and the management teams of those banks understand really how all the individual decisions that we make every week fit together into, what we call, the balance sheet and the profitability structure. That’s what we’re looking to do.
Dallas Wells: Sean, one of the first ways that I think your company and PrecisionLender really matched up was you feel like the one lever that banks have to control that profitability and risk comes back to pricing. That’s the action that you can take to move those things.
Sean Doherty: It is. There are hundreds of asset liability models out there, and we looked at a lot of them. Dallas was involved in a lot of that with us. We built ours around a simple concept, which is having an efficiently priced balance sheet. Most models that we looked at are built by software developers or consultants in the accounting field, and they ask different questions than bankers ask, quite frankly. One of the things that we were really excited about was building something from the ground up that answered the pricing question in a way that really hasn’t been addressed before. That was the genesis for how we actually started down that path. I tell people all the time, if I knew now what I should’ve known then, I never would’ve done what I did. But we’re here, and it’s been a fun ride.
Dallas Wells: Great. Jill?
Jill Castilla: Jill Castilla, I’m the president and CEO of Citizen’s Bank of Edmond. We’re a 250 million dollar bank in suburban Oklahoma City, an affluent suburb of Edmond, Oklahoma. Edmond’s highly educated. We’re kind of the lone remaining original bank in town. We’ve been there, on the same intersection, for 115 years. I came back to the bank in 2009, after about a decade at the Federal Reserve Bank and a bank in northern Minnesota where I was a CFO.
The bank was in trouble and I led the turnaround of the bank. We got to visit the very bottom and go through lots of dark periods. Orchestrated the fastest turnaround in the nation without adding capital. I had all kinds of terrible nicknames during that time period. It changed a culture to one of high ethics, but then now trying to change a culture into being something that’s unique and kind of a unicorn out there, and much more positively focused rather than just having to go back to being honest and being accurate and accountable, kind of the basic tenets of a community banker. Our bank sold all of its branch locations. We actually have one remaining branch … Two branches in downtown Edmond. We’re in the process of consolidating both of those.
We’ve developed some of our own technology. We developed a interactive teller at the ATM. Again, we’re just a teeny-tiny little bank, but we put that in place whenever we couldn’t get that functionality from the ATM companies. When we sold our branches we did interactive teller at the ATM before it was available for anybody else. We resell that to other banks now. We have also partnered with other fin-tech companies to deploy some technologies that we haven’t released fully to our customers yet, but are starting on the road to do that.
Our goal is to be around for another 115 years. Our bank is owned 1/3 by ESOPs, so our employees own part of the bank. They got a great lesson in what that meant whenever we went through our downturn and lost 12 million dollars, had 12 million dollars in loan losses. But then, also, we found through that recovery, what our strengths were. I’m an asset liability nerd. That’s how I fell in love with community banking. Our cost-of-funds … We were able to keep all our deposit customers even though we sold all our branch locations, with a cost-of-funds of 0.06, and that keeps declining and our duration is forever on our deposit base. We were able to really kind of go through that period of great disruption and figure out that we’re scrappy enough to survive, that we have a deposit base that will stick with us, so how do we turn that, now, into our competitive advantage out there as a community bank.
Dallas Wells: I love how Jill makes it sound real easy, we led this quick turnaround and then we did this. There’s a lot of things we’ll come back to there, Jill. Todd …
Todd Classen: Todd Classen with Moody’s Analytics. Moody’s, as many of you know, is a rating agency. Some of you may know there’s also a software arm Moody’s Analytics side of the house, which is made up of a variety of acquisitions of software that’s designed to help banks with risk management and regulatory reporting and a number of other things.
I come from one of those acquisitions. Over the last couple years, a product formerly called Web Equity, that some of you in the room here have or have experienced. But my background, and I do make the joke that I’m not a banker for one reason … In particular, I love to learn from the bankers about their problems and their processes and don’t want to assume that I know them.
One of the neat things about our software, and we have about 800 customers on that, is the way that this product can be rolled out, in particular to community banks and others in helping them solve those problems, and walk through a lot of the similar experiences for how we can help solve a solution or whatever, like PrecisionLender tries to do, by listening to customers and then taking that feedback and putting it into the development cycle.
My history with them is I ran the product management for about four years. I have an engineering background and I’m that guy that Mike referred to that was an engineer and never wanted to be in sales, but have moved over to the sales side of the organization to get to spend more time with customers. I visited about 100 banks last year, about 125 the year before that, and get to enjoy hearing, even though it’s sometimes challenging for the banks, enjoy hearing some of their challenges and points of view on the struggles of continuing to grow with all of the challenges that technology is, in their instance maybe, causing them. When really that technology should be helping them.
I spend a lot of my time trying to talk about how other customers used products, whether it’s our product, another product, or just in the related process of how you pick vendors, to help banks understand that process of buying software, whether it’s ours or somebody else’s. Making sure that it’s the right fit for what they need so they can continue to grow their bank and such.
Again, I want to acquiesce Sean’s comments in particular, it’s been a phenomenal conference, so thank you for letting us be here. We’ll hopefully give you guys some more value as we rap through this session.
Dallas Wells: Thanks for the intros. Hopefully that’ll give you guys some idea of who’s up here and where to point some questions. But let’s start with, and Todd we had this conversation earlier, but let’s start with the whole purpose concept. I think Roy and Lisa really did a great job with that yesterday, but talk about why you guys do what you do. What’s really the kind of underlying, driving thing?
Todd Classen: Yesterday’s sessions, for me, had a lot of high personal notes. This whole bank on purpose, and I think that this is probably one of the best conferences I’ve been to from this … This wasn’t originally planned, but we were talking about it earlier, as I heard Roy and I heard Lisa, it pretty much defines the story of actually why I’m in this seat doing this job. It also defines a story why maybe, I believe, banks need to be a little more vocal about what their purpose and stuff is.
Myself, personally, came from a family farm in south central Nebraska. In ’79 my father went into a community bank and said, “I want a loan. I need some more ground. I want another quarter of ground. I want a brand new John Deere tractor. I want a new pickup and I need a new tractor … New grain truck.” He’d been in farming for about 10 years, and had a couple really good years, and he was ready for that next step. The banker sat across the table from him and told him no. He took that and said, “You know what, let me give you some advice, here’s a gentleman you can call in the community that can help you find a different tractor.” We ended up with a used case. “Here’s somebody that can help you get that grain truck and that pickup. I’m going to tell you, don’t buy land right now for these reasons, you’ve got some challenges.” My dad barely has a high school education. He’ll tell you he has an eighth grade education, so he listened.
This is all before I realized what’s going on. We get to the first part of the ’80’s and we have neighbors that are selling their farms, and families that are getting divorced, and people moving to town or to a different state, and I really don’t know what’s all going on. Dad explains to me, “Well, they fell on hard times, losing the farm, all that good stuff.” ’87 rolls around and we get a brand new pickup. Again, not fully comprehending what’s going on here. He says, “Well, we paid off the farm this year.” Okay, great. Didn’t know what all that meant.
Fast forward a number of years. I spent 12 years working for Hewlett Packard. I, personally, was doing a lot of business process management type of stuff, and business intelligence things. Had a great job, but a lot of my time was spent taking jobs out of the U.S. and moving them into Juarez, Mexico for manufacturing and those types of things, and efficiency gains and cutting, and where can we save more money with inventories and all that kind of good fun stuff. I just didn’t feel like I had a purpose.
Was doing a little soul searching and interviewing with a bunch of different companies, and didn’t really want to be in banking, didn’t want to be tied to banking. But I found this really cool little software company that their technology, and the way that they approach things, was to be able to take some of the technology of big banks and bring it into smaller banks and community banks. They have a bunch of community banks that they’re helping, hopefully will adopt all of this stuff. I kind of thought that was neat. I talked with my dad about it and he goes … This is when I finally learned the rest of that story about the history of that Mr. Herbeck that had helped my dad. All through those years my dad always said, “Well, we had some good luck and we had some good advisors.”
One of those was that community banker. It really kind of hit home with me that that one individual had that much impact on our family. This many years later, I’m still talking about how he, essentially, could’ve saved our family farm, for all intents and purposes. Probably never ever advertised one bit about how much of an impact that had inside the community, doing little things like that. I was sitting at a table over here during Lisa’s session yesterday and somebody talked about they had helped somebody get a mortgage and they’d helped somebody … By doing that little extra effort, they’d really helped them make that kind of impact. I can only hope to have as much impact as some of you have the opportunity to have to a family … Of one, that kind of impact that was made to our family.
But, a few years back, that was kind of my decision in coming into technology. I felt like I could connect dots between what was out there in technology and what there were needs for solutions to problems, so that maybe I could help community banks continue to thrive within the communities they’re in. That’s a lot of what this bank on purpose really is about, a lot of what these sessions were about today. For me, personally, it’s a personal story that I hope … Some of you guys go out there and put that purpose together for your bank and build on that within your community. Let the community know some of that.
I can guarantee you, in 2008 you told me about community banking, I didn’t think anything of the impact it had inside its communities. You’re just bankers to me. Not coming from the industry, you’re not doing yourself enough justice in not telling a story about what your impact is in the community or the purpose of your institution. That’s just my two cents on it, and I appreciate being able to share that with you guys ’cause it really did truly drive my passion of change for the last 7 years and what I try and do with banks like yourself.
Dallas Wells: Todd, that’s interesting that a lot of the times the biggest impact is the loans you don’t make. My early days in banking, I did a little bit of lending before everybody figured out I was really bad at it. One of my early lessons in that was … I’d found a deal that all the numbers worked. The cash-flow worked, the collateral was there, the Cs were all met. I take my boss, the CEO out to meet this guy and tour his factory. He’s wanting to do this big expansion. We walk out and I’m proud ’cause I’m dragging in my first big deal. I tell my boss, what do you think? How do you think this looks? He goes, “The worst thing we could possibly do would be loan that guy a million dollars. We will ruin what he has going.” We said no. I didn’t understand why, fully. The other bank in town did the deal, and five years later they foreclosed on it. The guy put up his house as some additional collateral to make it work.
It really is, sometimes … We talked a lot in our advisory board meeting on Wednesday, about metrics and putting those things in front of your lenders. That’s one of the reasons that we are always a little reluctant to facilitate that, to put that data … Again, it’s how do you use that information. We ask a lot of questions. What are you doing with this? How are you using it? How are you incentivizing your lenders with it? Because you can really wield it as a pretty dangerous weapon. If your lenders are out there to sell, sell, sell, sell, and that’s the only outcome that they know matters to you, there’s some dangerous things that can happen.
Sean, what about your story? How’d you land in technically working for a bank but really serving banks all over the country?
Sean Doherty: Well, I fell into it.
Dallas Wells: I think most of us did.
Sean Doherty: I’d love to say I planned it, but I didn’t. I was 23 years old and needing a job, and a great man hired me, who eventually bought my company. He was a great man twice. But I’ve been dealing with community banks for 33 years now, and that story is exactly the reason why I love being in the industry. It’s really a cool thing to know that you can help people, but at the same time have a business plan, have a business model, do things the right way and figure out that yeah, we can be successful doing it the right way.
I think that’s really what excites me about what I do. We talk to a lot of banks all the time, but really our idea was to bring … As Todd rightly pointed out, the technology of the large banks down to the community bank level. We were able to do that in a way that nobody before had been able to do. Like I say, there’re a lot of companies that do similar things to what we do. I don’t think there’s another company that does exactly what we do, and that’s fun. That’s a great place to be. We are not the answer for everybody, I get that. But it’s like the loans you don’t make, in our bank we call them reverse home runs. There are deals that you shouldn’t make and you don’t like not making them, and you find out three years down the road that you know what, that was the best thing we could’ve done, both for our organization and for theirs.
The thing I’ve loved about PrecisionLender … We were an early adopter. I’d love to say that we use every aspect of it, and Dallas will tell you we don’t. But we need to learn more. We need to utilize it better, because it’s a great technology, but it’s a great technology that allows you to do your job that much better. That’s really what technology should be doing. It shouldn’t make our jobs harder, it should make it easier.
When I got into this, I started working for a bank in portfolio, fixed-income sales. I still dabble in that a little bit. But getting into the asset liability management in 1995, I left the company I was working for, started an investment advisory firm, and that investment advisory firm basically was built around … I know this piece of the balance sheet, which was the investment piece. I didn’t know anything else. I knew nothing about what you guys deal with every day. We knew that we had to learn that, and the best way for us to learn that was through the asset liability management piece. This was before it was a big regulatory buzz word.
But we soon found that the business model that we thought we had was not what we really had, because it wasn’t investment advisory services we were selling, it was asset liability management services that we were selling, it was balance sheet understanding. That’s what kind of converted us from strictly being in investments to understanding oh yeah, there’s a loan strategy that really drives a lot of the decision making in the bank. How do we match that loan strategy and compliment that loan strategy with what we’re doing on the deposits side, what we’re doing on the investment side, what kind of off-balance sheet strategies we want to employ, what type of on-balance sheet liquidity strategies we need to employ. Once we figured that out, it was … The ah-ha moment for us was, oh yeah, we can do that. Not only that, I think we can build a better mouse trap to do it with. That’s really how we got into the business.
Dallas Wells: Jill, why do you do what you do, and why’d do take on a bank that was in trouble and go through all that effort?
Jill Castilla: I grew up in a really poor community and we were a really poor family. Single dad raising two daughters. His intentions were to get us graduated from high school and kind of on our way. The matriarch of the local bank was such an advocate for me growing up. Anytime my name was in the paper I would get a note with some money in it. Or if I couldn’t pay for some camp she would always swoop in and ensure that I had a way to go there. Our family didn’t have any kind of relationship with her family, but she was just very cognizant of the youth in this community that may need an extra hand.
She continued to stay in touch with me throughout my career. I enlisted in the army when I was 19 so I could pay for college. My education is more in engineering and mathematics than it is in banking. But whenever I ended up going to the Federal Reserve Bank and getting a taste of analytics, and then going to graduate school banking and got to run a bank through assimilation program, really fell in love with just not only the intellectual rigor that banking can provide and the complexity and flexibility that you have to develop your own business model … That there’s just not one cookie cutter way of doing things … Really loved that piece. But there was also that social consciousness element that I remembered from my youth that Ms. Maybree really extended a heart and soul to me, and I was really through the bank that she was able to do that.
I went to a community bank in northern Minnesota. One of my classmates recruited me to come up there. I could see that in action. When the opportunity to come back to Citizens … I had worked there previously for minimum wage before I joined the Federal Reserve Bank. I was drawn to that again. My mom married late in life to one of the owners, a part of Citizens bank. I had a really turbulent childhood, which would not be appropriate to get into here. But my parents have been married 14 times. My step-father, this was his first marriage. It gave me the opportunity to be part of a legacy that I didn’t really have available to me growing up. He was about to lose this bank and asked for my help in coming and representing him, to turn it around.
It was really my heart that brought me, more than anything else. I took a huge pay cut to come back to Citizens, and was able to save something that I hold really precious, not just from the dollars and cents standpoint, but this impact that this bank has had over its 115 years to the community that serves. Then, because of our ability to be financially responsible with our shareholders and create an opportunity for wealth there and a strong financial performance, we’re able to be more of a contributor in our community.
We’re the smallest bank in town, but we give at a level that’s five times what any other bank gives to our school system, for example. We’re able to lead the way with every nonprofit, to give not only of our money but of our time. We do a big community appreciation event in downtown Edmond and we allocate resources to that. We’ve put $70,000 … We spend only $25,000 a year in advertising at our bank, but we put $70,000 towards this event in downtown Edmond, basically like your normal customer appreciation day that we have as banks. We have 20,000 people that come to that, and we hold it eight times a year. We’re able to create this great community spirit, and you’re able to do it with so few dollars.
Our kind of unspoken motto is if we do good, we’ll do well. I over-analyze everything and I have all the tracking metrics. I love data. But data can be dangerous, because if you can have a soul and a purpose and a social awareness and you become something … When it becomes banking with you is doing good for our community, even above and beyond just the local aspect, your able to draw cheaper dollars in, you’re able to charge a little bit higher for loans, and you’re able to do better financially because you have these intentions of doing good. That realization and folks having faith and consistency with us through our recovery was so profound for me. Previously being very data driven, goal driven, and now having greater faith that if you do the right things and you have great intentions and your fiscally responsible, that you can achieve more than what you’re able to achieve ever in your wildest dreams otherwise.
I think it’s something we all have in our back pockets as community bankers that we don’t use as effectively, that we are this great social consciousness engine of our communities. That we’re many times the heart and soul of it, just like the school system and the faith system in a community. We’ve really been able to see the benefits of that with Citizens bank. People want to bank with us. We have one location, 50 banks in our community, and they’re willing to drive past all these other banks, go into a really contentious parking situation, pay more for their loans and get less on their deposits, and still choose to bank with us. We’ve seen growth even in areas that are out of town where merchants are wanting to do business with us because of how we’re impacting and caring for our community. I think that’s an opportunity that we all have as community bankers, to sell that a little bit more through our actions, using different media to be able to amplify that. Maybe even getting away from traditional advertising … Hopefully there’s not newspapers and stuff represented here.
Dallas Wells: CD rates in the newspaper.
Jill Castilla: But there’s a way to really amplify that and develops advocates for your brand through the social contributions that we make as community bankers.
Dallas Wells: The event that you guys do is called Heard on Hurd, correct?
Jill Castilla: Mm-hmm (affirmative), yes.
Dallas Wells: Talk a little bit about where that came from and how a 250-million-dollar bank puts on an event of that size. That’s got to be an all-consuming thing, eight times a year.
Jill Castilla: We started doing it in 2014. We just thought we would try it once. I wanted to do a music festival for some time. We had this very negative connotations around our bank because of the recovery and lots of rumors that we were going to sell or that we were going to fail. After we recovered, I reached out to a bank in Ann Arbor, Michigan that had been putting on a music festival, Bank of Ann Arbor, great bank. They do a summer concert series during the lunch period. We thought maybe we’ll do something similar to that. Then we also added components of food trucks and small business pop-up shops in which we provided free access for those. We did all the planning for the event. We had hoped, for the initial one, to hopefully attract three or 400 people to this downtown customer appreciation day, but you would be paying for your own food we would just be providing the band and the space.
We ended up having three to 4,000, just individual cells that occurred that night. Every food truck sold old. They had never been to our community before, assumed that they wouldn’t be able to do good business there. Now it just … We’ve had to grow the size, as far as the blocks that we block off for that. The next month we doubled that attendance. We consistently have, some estimates, are 45,000 plus an event. We always say 20,000 just because we aren’t looking to go to have this mega event that’s crazy in numbers. But what’s so incredible about it isn’t necessarily the number of people that come, which is pretty awe inspiring, it’s as I’m walking through the crowd I’m getting pulled aside saying, “Thank you so much for Citizens doing this.”
It’s our staff, they’re not getting paid to work this event, but spend a Saturday, almost all day and well into the night, planning and volunteering for it. It’s the accolades that we’ve been gaining in the community. Urban Land Institute provided us the Impact Award. Here we are this suburban … Something in an area of town that most urbanites really despise, because it is kind of urban sprawl. All the wealth has gone away from the central core. They’re giving us awards saying we’re creating this urban experience in Edmond that’s contributing to the overall metropolitan area. It’s happened very organically without having a goal to get to X amount.
It’s been, I think, a beautiful experience of what a bank does. Where we can talk about that if you’re banking at a large institution, you’re sponsoring a national artist in some far away land. But you bank with us and we are able … Our customers, our shareholders are able to bring local music here and the local vitality to our community, and to our home. Only a community bank could do that.
Dallas Wells: One of the other things you mentioned earlier was some of the home-grown technology things that you’ve put together. Todd, maybe you can chime in on this one too, but … We talk a lot of times to 10 billion, 15 billion dollar banks that they say, “We like the idea, but the technology hurdle’s just too high.” How have you guys kind of, with a lot less resources, made those things happen?
Jill Castilla: The great thing is, technology is cheap. As bankers we never get to see that, ’cause everyone takes advantage of the fact that we have deep pockets, so we get charged a lot for a lot of out of date technology, as far as from a … Really, the essential components that we have …
Dallas Wells: Think I heard an amen back there.
Jill Castilla: Seriously. I mean, I want my pitchfork and my torch. But there are things that we can do that don’t put our customer information at risk, that we can portray ourselves as being technologically advanced, and still be very conservative in how we’re approaching technology. The technology that we implemented is basically FaceTime. It’s not FaceTime, it’s over a secured connection, but it was actually just developing an interactive audio visual component at the ATM kiosk that we could attach that had weather resistant qualities. It’s actually the same exact thing that Diebold ended up implementing for their device. We were able to put it together. It cost us $11,000 to put this device together, and that was the prototype, so you’re not getting any kind of economies at scale. Whereas, we could do buy the $140,000 ATM that provides the same type of technology.
We just need to understand there’s things that we can do that really have no regulatory concerns … We weren’t putting customer information … It was basically the same technology as when you drive up through the drive through teller and you’re having an audio visual interaction with a teller in the drive through.
Dallas Wells: Yeah, they’re just a little farther away.
Jill Castilla: You’re just able to extend that. There’s a great eagerness out there for fin-tech companies and other technology companies to interact with us. We had two local firms, one is … Does anybody go to Sonic? This firm had the first push button talk … What, from an audio standpoint, was Sonic. We partnered with them and then a company that does kiosk in high-end hotels that have touch screen kiosks. We came together and were able to put this in place and then now sell it to other institutions. Now we have kiosks in our banks to kind of see, well can we take the hospitality model and put it into a community bank piece. It doesn’t have account numbers, and it’s not providing any customer information, but just as an add on benefit that makes people perceive us as if we’re more technologically advanced than other banks.
Dallas Wells: Greg Demas mentioned this yesterday as well, just taking the control away from those core vendors and saying this is kind of our technology, we’re going to force the issue on you. Todd, I think you guys would probably, I think by definition, us and you guys would be called fin-tech. Which I think a lot of bankers see as a threat, and that’s not how we approach it at all. It’s much like how you all have used it where, there’s people out there who know how to get these things done, and what we want to do is partner with banks and find ways to help you solve those problems. Todd, that sounds kind of like what you guys are doing. Talk a little bit about that, of kind of that I.T. hurdle that’s out there and how you guys get through some of that.
Todd Classen: Well I’ll start it with tying back to my original story a little bit, about how I got into this. Banks as a whole have a big commitment to make to the community. They’ve got a lot of time and a lot of things that is being asked of them in a lot of directions. Similar to my dad saying, “Hey, I’ve got these trusted advisors around us to help make us sure we’re on the right track.” I think banks need to take advantage of some of the technology firms to be some of those trusted advisors. You do have to go through a process of picking the right ones. As Sean alluded to earlier, no one solution is perfect for everyone, but hopefully if you go through the right evaluation process, you’ll find the ones that are right for you to partner with.
In our case, what that allows some of the banks like yourselves to have in the smaller size, is some of that technology that bigger banks have and bringing it down. We do that by … Yeah, a lot of the big banks do pay a bigger check and do contribute a greater responsibility into our product road map. How we evolve the product takes feedback from a number of the larger customers that we have, but we have a conscience about making sure we interviews a lot of our smaller customers also and see how can we modularize this product so that you can take and adopt it in the hurdles that make sense for you.
Similar, I’m sure, to other products, when you deliver it via the cloud and you can deliver it in a modular fashion, you can then bring the price point down for the community banks to adopt what they need today. As they grow, hopefully they can adopt more and more and more, and it helps them along the way. They also got in at a lower price point and it’s grown with you.
I think that’s a model that I’ve seen, at least from our standpoint, that’s worked with a lot of customers. We do have 800 customers, about 600 of them are under a billion in size. A lot of them have started down that path of being … We just need this today, and they grew and they see more value, and they grow and they see more value, and it has grown with them. I think, as you go through the process and as we talk about how to banks like Citizens and stuff go and find technology, fin-tech people to work with, keep it close to what your priorities and stuff. Make sure they’re going to somebody that listens to you and grows with you, somebody that you can continue to grow with. Slow down the sales cycle. Don’t worry about the sales process as much as the buying process, as was alluded to by Mike. I thought that was great advice.
Dallas Wells: I’ve, again, dominated all the questions. I want to make sure we give you all time to ask any questions you might have. Is there anybody out there that would like to ask anything of anybody up here? Yeah, we’ve got a couple out there it looks like.
Speaker 6: Jill, I’d like to ask you about just the cultural challenges as you came on board as CEO of your bank.
Jill Castilla: Culture change has the most suck associated with it than anything else in the world. ‘Cause that is the hardest nut to crack. I came into an environment in which it was perfectly acceptable to lie, to misrepresent, to evade questions, to spend money of the bank irresponsibly on your own things. We paid for weddings, we paid for all kinds of things. We had folks that were watching porn all day. I mean it just about everything that you possibly could imagine. That culture change … I think it’s necessary, if you walk into an environment like that, to really kind of get the ethical standards in check. My nickname during that period was cobra. I’m sure there was lots of other nicknames. But it was not nice Jill, it was I didn’t trust a soul. They didn’t warrant my trust because they consistently misrepresented things.
But I was very resolute and absolute with what I thought was right and what I thought was wrong. We put structures in place, we didn’t have controls in place, we had lots of theft, fraud that was occurring. There was no tolerance. I had to hold myself to a standard that far exceeded anything I’d ever set on myself before. As that consistency happened and as the team started seeing the bank change, and that they started understanding what a real business was supposed to look like, some left because they didn’t want to be a part of the new way of doing things. But many of them stayed and eventually started coming over to the other side, into this dark side that they perceived. We really had the same team in place, for the most part, that we did back then. Some of them didn’t talk to me for over a year. Some of my senior team members that I had on my team right now did not speak to me for a year when I first got there.
I think consistency and just an absolute … For me, I was ruling out of fear. We were at the very bottom of the CAMELS rating system. It was not a pretty picture. I was scared we were going to lose the bank and that my career … I was 37 years old, I was afraid that my career was going to be over with. You’re getting fingerprinted, you’re signing all this stuff, and you see all this fraud happening and you don’t want to be banned for banking for the rest of your life, so you’re trying to get things under control.
But once we were removed from our written agreement in March of 2012, I would say probably 75% of the team was in the groove. They knew, now, what the new standards were, they were adhering to them and, in fact, started holding their peers accountable. It was also … Became really apparent to them when they got their first 401K statement, when the stock value went from $51 a share to $9 a share and they had most of their wealth in their 401K tied to our stock. They literally didn’t understand what was happening. They were like, “Why is this so small?”. I’m like remember those 12 million dollars in loan losses over the last six months? That’s what happens. Remember that draw request that you approved when you knew they weren’t building a house but just pocketing the money? That’s what happens. That consistency really helped us get kind of a standard of ethics.
Then it started just slowly transitioning into let’s try to have a little fun with this. We are all on the same page, we survived and we know we’re going to have to do things different going forward in order to be around for another 115 years. We fought like hell to save this bank, we’re not going to let it go down the tubes just because of a little bit of regulation or a little bit of competition. How can we do things differently? We did a music video, which is the next logical step for anybody.
Dallas Wells: By the way, get the Googling ready ’cause you do have to see this.
Jill Castilla: We did this video, we did Gangnam Style right when it first came out. I was driving in my car and my then 10 year old daughter is singing every word of this Korean song. I had promised our staff that we would do something fun because we had reached this goal of service. We were trying to get us more service-oriented again. I came to my team and I said, “We’re going to do this Gangnam Style video.” I was the chief credit officer at the time. It’s not a typical thing that your chief credit officer would come to you with. The president was like, “This is crazy, I’m not having anything to do with it.” I told our board we’re going to do this. The board said, “This is brilliant. We need to do this. We need this for our bank.” The president got on board then and was like, “Okay, we’ve got to do it.”
You can see this video … When I watch it, I see our culture leaping forward light years. Because you just see the shedding of stress and anxiety and just this … The team kind of coming together in this ridiculous, stupid video we did. It was featured on every local channel of our news. We got national attention for it. We shouldn’t have, ’cause none of us can dance. But it really was a game-changer for us.
Also, the day we were removed from the written agreement, I joined Twitter, that same exact day. I was sitting in a conference, in a social media workshop, and they were talking about if you’re on Twitter and you’re engaged you can optimize your search engine results. At that time, if you had searched for bank Oklahoma, bank Edmond, you would see stories about our bank and the failures and trials that we were having. I wanted to change that. That’s why I got engaged on social media. It really started building community there and started, then, a further amplification of what this culture change that was happening. It just fed on itself.
Then you started seeing our employees talking about working at the bank on their Facebook pages or on Twitter when, previously, they would’ve gone underneath a table if someone started talking about their bank ’cause they were so embarrassed to work at the bank. This sense of pride started happening and it just started feeding on each other. We didn’t have an objective in mind as to where it was going, but both of those changes were led from the top. They were a directive that we’re going to do something, and was very absolute when it came to ethical revolution. But the trying to take us to a place that we’ve never been before was more of this experimentation from the leadership, and then kind of getting everyone … Forcing them to participate at first, and then letting it start evolving with me steering it where it needed to go.
Dallas Wells: Greg, if you’re looking for that nugget to take home that I promised you, you and Brett, Gangnam Style video as soon as you get back. There was a few other questions out there.
Speaker 7: This questions for Sean. One of the big things that’s kind of pervasive in the banking industry right now is embedding risk management into your culture. I think having a fundamental understanding of the asset liability management is part of that. What are some of, maybe, the best practices that you’ve seen at some of your client banks, and how they impart that fundamental A.L.M. knowledge throughout the organization?
Sean Doherty: Great question. It really begins with having information that you can impart easily to your staff and to your team members. ‘Cause if they can’t see it, they can’t buy into it … One of the biggest things that we’ve seen in our clients is that they have a better understanding of exactly what their balance sheet looks like. We, as an industry, have been playing and managing by fear. We’ve managed our interest rate risk with the fear that if rates go up, I’m going to look stupid. One of the things that we’ve really been able to demonstrate, Jill alluded to this earlier, is if you truly understand the dynamics of the liability side of your balance sheet and how long the durations of those liabilities are, and how important those are to the funding of the asset side, once you kind of get that, that fear kind of falls away.
Because I can … Countless times I’ve been in consultation with clients who would say, “We never do five year loans. We’ve never done them, we’re never going to do them.” I’d say really? Because that doesn’t make sense to me. You got liabilities that are roughly 15 years. But they don’t see that. They see oh, I’ve got these daily demand deposits that could go away tomorrow. Yes, they could, but they won’t. Trust me, they aren’t going anywhere. Our job was to demonstrate that and show that. That there is a way to measure it and to … Once management understands that, it’s like oh, okay, so five year loans aren’t the devil. Particularly in the last 7 years, I would argue that when you’re in a zero interest rate environment, if you are not modestly extending durations on the asset side in response to that, then you are mismanaging that balance sheet.
Because, John made the point yesterday which I thought was excellent, and that is if you believe that no rate change is safe, then you don’t fully understand exactly what you’ve got. As an investment guy, that was one of the things that I always rustled with. Clients would say, “Well no, I’m going to stay in fed funds can I need liquidity.” I’d say, “Okay, you need liquidity. How much liquidity you need?” “Well, I don’t know, but I’m going to have as much as I can have.” I said, “Okay, so you’re going to” …
If you explore that a little bit further it is well, I think rates are going to go up and if rates go up I’m going to be ready for them. I agree. If that’s your conviction, you need to manage to your conviction. At some point though, you have to look back and say is my conviction right, and how am I obtaining that conviction, and should I change the method by which I measure what my conviction should be.
We always tell clients, “When you start your ALCO meeting, you should get an understanding of what the interest rate bias is of the members of that committee. Because until you have an understanding of what the interest rate bias is, you can’t interpret any of the output correctly. If your interest rate bias is that rates are going to go up tomorrow and go up a lot, then I’m going to interpret what I see differently than if my conviction is rates could go up, but I don’t see any way they’re going to move up soon and to any large degree. That gives me a whole different perspective on that balance sheet. That’s what I want to try to get. That’s what I want to try to understand. When I understand that, then I can impart that to the team. Once they understand it, they become more confident in the decisions that they make.
They also see oh yeah, I can see that that decision had this impact. Because, in our banks, we tend to create committees. These committees do different things, and these committees don’t talk to teach other very often. We have a loan pricing committee on Tuesday, we have a deposit pricing committee on Thursday, and whatever decisions were made here have no impact on this committee. That’s nonsense. One of the things I think that helps is to have a story that you can tell about your bank that shows here’s how every decision that you guys make impacts what the results are at the end of the day, and why I don’t want you to be afraid to make certain decisions. Because, again, if we manage by fear we’re in the wrong business. We have to have some conviction in order to understand where we’re going.
What I would argue is, if you can tweak whatever asset liability reporting that you’re doing to show the picture of where you are as an institution, you can share that with … Board members will understand it, staff will understand and most importantly, your committee members will understand it.
Dallas Wells: I think an important point there, Sean, and one that we talk about a lot even with the pricing decision part of it, is transparency. Banks are so … I get the reason for being very protective of your customers’ data, but the bank’s data … There’s no reason for all the cloak and dagger stuff, and especially ALCO. You ask most bank employees what ALCO is, it’s the super secretive backroom thing. That’s kind of the heartbeat of the bank. That’s what’s driving a lot of the other results and a lot of the decisions. Share that stuff, and find a way to make it … Pictures help. Find a way to get some charts so that people understand if rates do this, here’s what happens to us. That’s why we’re making these decisions.
Tell your lenders. Your lenders say, “We got to do fixed-rate loans or we can’t compete. Got to do fixed-rate loans, got to do fixed-rate loans.” That doesn’t have to be this butting of the heads all the time. Explain to them, here’s why those are painful for the bank and here’s why we have to price them that way and connect the dots for them. They’re willing to play on your team and be on the same side as you, just show them why. I saw another hand up back there.
Speaker 8: This is a follow-up question, I think, for Sean. We get to talk to a lot of banks and we end up having conversations around their asset liability management process, and one of the things that we’ve observed is, particularly in those ALCO discussions, there’s a lot of focus on the funding side, the liability side, the balance sheet, there’s a lot of focus on the investment portfolio. There seems to be less focus on the loan portfolio. Of course, from our perspective, we scratch our head a little bit about that because the biggest asset on the balance sheet is the loan book, and it still generates 50% to 60% of the revenue for most banks. What are some practical ways community banks, particularly in that ALCO process, can elevate the discussion around the loan book and the loan portfolio, and make that a little more strategic in those conversations?
Sean Doherty: One of the things that we find when discussing loan and loan strategy is everybody has a thought, but there’s not generally a coherent thought. What we’re trying to accomplish is to say okay, what are our customers telling us that they need … Here’s a great story … This is something that we run into quite frequently and it’s around pricing decisions and how that all works. We had a client said, “All we seem to be booking are 10 year loans.” I said, “Really? You’re booking 10 year loans?” “All fixed-rate 10 year loans.” I said, “Well, tell me a little bit about what you’re doing.” We started talking, he said, “You know, really our customers see us as their financial advisor as much as their banker, so when they ask us, ‘Well, rates are at 40 year lows,’ what would you do?” I say … This is the banker telling me, he goes, “I tell them I’d lock it in.” All right, that’s why you’ve got 10 year fixed-rate loans going on the books. Because you’re not giving them an option, you’re not educating them. We had 40 year lows seven years ago, we had 40 year lows six years ago. We could have 40 year lows six years from now. Is that really the only reason we want to do that?
But more to your point about how do you … It’s the biggest piece of our balance sheet, it should deserve the most attention. I think, in most ALCOs that I’m involved in, it is. It is definitely the driver. But I think that what happens is it gets lost. We want to talk about deals, in ALCOs we tend to want to talk about deals. Oh yeah, that John Smith deal, we did this and we did that. Really what you want to talk about is structure, and how do we position ourselves to accomplish the goals of the organization within the rate environment that we find ourselves in and will expect to find ourselves in. I think that … If you can direct that discussion away from deals and into structure and get an understanding of how that all fits together, I think it becomes a much more productive conversation, if not an easier one.
Dallas Wells: Loans really are just financial instruments. They have structures just like bonds do. The story you’ll hear, the phrase you’ll hear on the trading desk is there’s no such things as a bad bond, just a bad price. Well, loans are a similar thing. We shouldn’t be telling … Within a pretty wide framework, we shouldn’t be telling our lenders you’re not allowed to do these things. There’s a price at which we should do those. Your price may be higher depending on what your balance sheet needs, but you can meet the needs of those customers. It’s just at a price that’s fair to both sides, that’s the key in how you kind of connect those dots, I think. Other questions?
Speaker 9: I taught banking schools for a while, and one of the things that always has amazed me is that most of the students can quickly identify the five Cs of credit, but if I ask them about the forward implied yield they look at me like I’m from Mars. Any ideas about why that is? To me, it’s a very simple and straightforward thing that you would think bankers would be focused in on, particularly in the lowest rate in the last 40 years, to give up the opportunity cost that you’re giving up every day that you sit in short-term. Or, on the lending side, go the other way. Any ideas about how to get that to be more part of the conversation?
Jill Castilla: I can talk about it a little bit, ’cause I’ve been trying to deprogram some of my recent hires, because it’s been preached to them so much, rather than talking about the opportunity costs … As we’re providing different options and the customer’s saying, and we’re competing against longer-term fixed-rates, they’re immediately saying no and then I’m having a conversation like there’s a yes there. There should be an option there, we just need to price it. Otherwise you’re going to be buying these 20 year bonds that may have a little bit shorter duration, but we have this massive duration on the deposit side that we know is really not disruptive … That there’s opportunity costs if we’re not doing the deal and we have excess liquidities. For us, it’s a no-brainer to at least kind of chase that. But I think it’s that, what everybody’s been preaching, and that’s what bankers end up preaching to their teams, is kind of more the fear factor rather than how do you go about maximizing your income while shielding yourself from betting the entire bank on some type of interest rate scenario going forward.
We just don’t have that conversation enough. I think a lot of it comes from banking schools. Whenever you sit in on credit webinars and loan pricing strategies, it’s all kind of more fear based rather than the opportunistic based, which allows, I think, some bankers to take away of that … I mean, banking requires you to have some smarts about you to wholly capitalize in that, this business, but the business model still works if you aren’t doing that. You’re still rewarded even if you’re kind of playing it super safe, you’re just not killing it like you could if you understand that concept better. I think that we need to have more of that understanding in our industry and that kind of intellectual rigor around how we manage our asset pricing, rather than just going with these are the tried and true laws of banking that we all must adhere to.
Dallas Wells: I think we’ve got time for probably one more question, if there’s anybody else out there that they want to throw to the group here. If not, I’ve got one that, Jill, we’ve touched on a little bit in our prior conversations but … I made a joke at the beginning of this conference of … We had the Twitter hashtag up there, so it was, “I’m sure that they don’t get a ton of use. All three of you that are on Twitter can use that.” You guys have actually, though, used social media … Again, not out of fear, not being scared of all the compliance stuff, but seen some positive ROI audits, everything from engaging with the customer base to setting up things like cash mobs for some of your downtown customers there that are nearby. Talk about, just kind of, that general culture and framework that you’ve tried to build around that, of making that not just an okay thing but an encouraged thing.
Jill Castilla: For social media for us, it started off as this plan for me to manipulate search engine results and has evolved into us being almost the head of the chamber of commerce in Oklahoma City for anyone that’s on social media. There’s such an absence of bankers that are out in social media, yet there are tons of small business owners, decision makers, and community influencers that are out there and that don’t attend traditional networking events. They don’t go to chamber of commerce meetings, they don’t go to the rotary, especially whenever you’re talking about millennial business owners. That it provides me access to potential customers like I never thought possible. It’s really similar to going to a chamber event that you’re shaking peoples’ hands and that you find something that you’re interesting in, that you see that there’s potential for one of the other or both of you, and then you schedule a lunch or a coffee to kind of get to know each other better. That’s what social media is. It’s really just handshaking just thousands of people’s hands. But then also being able to target some folks that are pretty inaccessible.
We do cash mobs where we give money to my team. I give $5 to every person to go to a specific business on a particular day, and the only requirement is that you take a picture of what you bought with your $5 and post it on social media or send a picture of it to the bank and we’ll post it on our social media. Well we intended to do that just to kind of create this increase of morale, similar to the Gangnam Style video. But what happened was is that this community … The community saw this and … We were on the front page of the business section of the Daily Oklahoman, our state’s largest newspaper, full-color, half-page picture with this business owner with a sign that says we love Citizens bank. We got that kind of publicity every time we did it. The community was lifting us up as being these small business advocates and that we’re the builders of that community within the metropolitan area.
We were then getting new customers, having businesses call us and saying, “Will you please mob us next time?” We had one non-customer that said my business is on the brink of failure, could you please cash mob me on Wednesday so I could buy groceries to be ready for Heard on Hurd on Saturday. That business ended up surviving through a really difficult period time because we were able to help them buy their groceries, and then they had a $10,000 night the night of Heard on Hurd which allowed them to sustain for a longer period of time.
This great community goodwill happens and it’s costing us $300 each time. Again, we’re not buying newspaper slots, but we’re getting highlighted in every paper every time we do it. Then we’re sharing that story with other bankers. Bankers around the nation call us and say that they want to do it, and we give them all the information we have so they can set up something in their community. It’s a competitive advantage for us. It’s a way for us to interact on social media.
There’s many examples where I’ve found someone that was complaining about my bank, and they didn’t tag me, they didn’t tag the bank, but I’m able to jump on top of that and correct the situation, and suddenly they’re an advocate for us. Someone else complains on social media, this person that was previously unhappy jumps in the conversation and said, “Oh no, Jill will take care of this. I’m tagging her. Citizens is awesome, it’ll be resolved.” You’re able to get these brand advocates that you can’t get for, in any other universe, except for kind of out on social media. Many times these are, again, community influencers that may not even bank with you but hold you up as being this stellar example what a community bank should be.
For us, it’s now an integral part of our marketing plan. We’ve been able to slash our advertising budget to almost just nothing, just basically to kind of keep the local paper kind of engaged. But otherwise, we really completely reliant upon social media, getting the earned media, which then has more credibility associated with it and allows us to have a further reach than we could have ever paid for otherwise.
Dallas Wells: I think, if there’s one thing you guys take out of that, you may not be able to convince your lenders to do Twitter, but if they’re not at least on LinkedIn you’re missing the basics that are really simple. Have them build a profile, put a picture on there. Your customers of your bank, they’re looking for information on you. Part of what Mike Bosworth talked about was people like to do business with people, and they like to buy from people and they like to buy from people they know and like. Walking into your branch and being introduced to a loan officer, that’s not knowing a person. But if you can kind of walk in a little warm, even if they’ve just kind of LinkedIn stalked them a little bit, there’s some real value to that. That’s how people make decisions now. You’re lender’s saying, “I don’t have time. I’m not messing with that stuff, it’s kind of kids play.” There’s real ROI that’s there and you’re missing opportunities that you never saw existed because you never got the chance at them. They’re going to Jill’s bank instead.
Jill Castilla: LinkedIn, I will pay attention to who’s checking my profile and my last two hires have been people that weren’t looking for a job that just checked my profile. I reached out to them and said, “Hey, I’d love to talk to you.” Big … The shining examples of commercial lenders in our Oklahoma City metro, we have large regionals that would never come to a small bank like mine that I’m able to then have lunch with. They’re like, “I’m not interested in a job, but I’m kind of interested in what you guys are doing.” Then, after a couple of conversations, both of them call me and said, “I want to be a part of what you’re doing. I don’t know if you like me as much as I like you, but I really want to be a part of it.”
We’ve been able to have these extraordinary hires that would’ve cost me hundreds of thousands of dollars going through a recruiter to get, and probably not getting access to the right people. But just paying attention socially, using LinkedIn, there’s such exceptional opportunities there that it really is a gold mine for everyone else. If you’re in the Oklahoma City metro area, don’t get on LinkedIn, just let me keep my pick of the litter there.
Dallas Wells: I’ll get us wrapped up, again, because it is Friday and it’s a beautiful sunny day in Austin. Thank you to all three of you. Really appreciate you taking the time. I think a round of applause for …
We have a slide up here called closing remarks and, don’t worry, you guys have heard plenty from me in between things. Basically, what we want to get out of this was to mostly put all of you in the same room, have you guys meet each other, spend some time with each other, and really get an understanding of why we as a software company that does loan pricing, why we care about these things, why we’re writing things like a book about earning returns through building relationships. That’s not a disconnect.
What we’re talking about is the way that you are perceived by your customers, that experience that you’re building for them, where that really happens is, again, not on the golf course. It’s not when you are buying lunch for your customers. When that experience really happens is when you’re building a transaction for somebody and then putting together the right solution for them and then getting it done. I think Greg Demas did a good job of laying that road map out. He had it on the screen, the flow from beginning to end. That’s your customer’s experience, and that’s what we need to be paying attention to and optimizing.
To do that, we have to stop looking inward at all the risk, at all the compliance, at all the, frankly, back office stuff. We have to look out towards the customers and look at what their experience is. If we optimize around that … Again, we can’t ignore the back office stuff. It has to be incorporated. But we have to do it from the customer and work backwards. Start there, at that experience.
That’s really what we wanted to talk about. That’s what allows banks to get back to their real purpose. That’s why we called it this. Being pillars in the community, going back to being the George Bailey’s in Bedford Falls, and really being an important part of people’s lives and businesses and the story that Todd told, which I think is pretty powerful. That’s what we’re really enabling. That’s where we have to start from as our foundation.
One last time, again, to our sponsors, the partners who helped put this together, to especially the marketing team here at PrecisionLender who did a lot of work, and again, most notably, Brandy and Ashley who really put their heart and soul into this. I think it came out great. Thank you everybody, for making the trip, spending a few days with us. Hopefully it was worth your time. Get on the app, give us your feedback. We want to know what we can do better next time. But we will definitely see you all next year, for round two of this. Thank you, safe travels home everybody.